The Hidden Cost of Infinite Energy (Part 1)

By Ellen FanningFebruary 6, 2012

Soaring power bills are hot today, with the release of Australia’s energy white paper. This February investigation explains why the real cost is in the gargantuan infrastructure we’re building to deal with our unchecked energy use.

The Greening of Rooty Hill

Like most of his patrons, Richard Errington has a pretty good radar for bullshit. As chief executive officer of the infamous Rooty Hill RSL club in the heartland of Sydney, he carries on the larrikin tradition of a place, which sees itself as the Vegas of the West. Amid the humble fibro homes with their cyclone fences, the vast white barn that is the “The Rooty” has been a shining jewel – giving the Bee Gees their first gig, keeping the crooner Kamahl in work during the lean years. It’s the sort of place the late vaudeville performer Maurie Fields would have gone to do mother-in-law jokes and where locals go for air-conditioned respite — a pint and the pokies — on those stinking hot western Sydney days.

It’s not the sort of place you’d think of as leading edge in terms of the food, the entertainment or anything else for that matter. But a few years back, Errington figured out something that’s only now dawning on many Australian households and businesses — the need to do something about crippling increases in the price of electricity.

In 2009, when his power provider announced his million-dollar annual power bill would rise to AUD$1.6 million dollars, Errington declared it “highway robbery” and decided — with no experience in such matters and not an engineer in sight — that he would build himself a state-of-the art, environmentally friendly power plant and generate his own electricity in the basement.

“At the time they said I was a fool. Just interested in being green!” he scoffs. “Now I’m a hero.”

While the rest of us are bewildered by ever-rising energy bills, Errington negotiated his way through the dizzying complexity of Australia’s electricity system and found a way to save himself a couple of million dollars.

Photo By Mike Bowers

The $46 Billion No-one Talks About

It used to be that power bills weren’t that bad. Not the subject of water cooler conversation or a topic that would come up round the barbie. But in the past few years, retail electricity prices have risen about 30 per cent around the country, with bills for customers in NSW increasing 22 per cent in one year alone (2009-2010).

Recently, one respected analyst told Australians to brace themselves for worse to come: power prices could double again in the next six years, with consumers in Brisbane, Sydney and Melbourne to be hardest hit.

And so they call up talkback radio to complain loudly and puzzle out who is to blame. Australia’s carbon tax is a prime suspect even though it has a cast-iron alibi — the tax won’t even be levied until July. The tabloid media want to blame the greenies. Somehow it’s paying the yuppies with the solar panels to produce their boutique green power, which has forced up the bills. But that’s only part of the problem.

The main culprit driving up electricity bills is this: In the five years to 2015, $46 billion will be spent on upgrading and extending Australia’s electricity network to cope with our ever-growing power needs. The cost of all this is being charged back to all households, businesses and industries through their power bills, locking in average annual electricity price increases of more than 10 per cent a year till 2014.

“They said I was a fool. Just interested in being green!”

− Richard Errington, CEO Rooty Hill RSL

In fact, by 2014 in NSW, the bulk of a customer’s electricity bill — 60 per cent in fact — won’t be the actual cost of generating however much electricity they use. It will just be the cost of shifting the electrons through the grid, down the poles and wires to their home.

You would think that would merit a national debate. After all, it’s costing more than the controversial $42 billion National Broadband Network.

One of the leading voices calling for an urgent review of this expenditure is economist Chris Dunstan. Research Director at the Institute for Sustainable Futures at the University of Technology, Sydney, Dunstan and his research collaborators from the CSIRO and four other Australian universities have spent the past three years assembling what they call an Energy Roadmap for managing Australia’s future energy needs.

Called “Think Small” it’s a detailed plan to drive down electricity bills — and with them carbon emissions — by getting serious about energy efficiency, managing demand for power at peak times and generating cleaner, local sources of power, using the sort of innovative system at the Rooty Hill RSL.

And it’s not some ivory-tower fantasy.

Federal Energy Minister Martin Ferguson, along with many key industry players, came along to the December 2011 launch of the Energy Roadmap. They were told that rather than needing ever more power from massive, coal-fired power stations located well outside Australia’s big cities, in future we may well need less.

“It’s like you’ve got a teenaged family, for years now you’ve been thinking, ‘We need more space,’ so now that the kids are almost grown up and gone, you build another floor on the house,” says Dunstan. “The world is changing and we’re just investing further in 20th century technology as if the 21st century hasn’t happened.”

Our Love Affair with Air Conditioning

It all started with a kind of buying frenzy in Harvey Norman show rooms around the country.

As the cost of air-conditioning units plummeted to about $1,500, the split-cycle dream came within reach for many people. Those systems just sold themselves. Between 2005 and 2011, the number of Australian households with air conditioners jumped from 4.6 million to 6.3 million. Now more than 70 per cent of Australian households have air conditioning, so suddenly we need an electricity system that can cope when everyone turns on those air conditioners at once on a sweltering summer afternoon in the suburbs — without turning anything else off.

The cost of building the extra capacity to deal with those few hours every year is enormous.

It is called peak load. And it happens a handful of times each summer — sometimes for only 40 hours a year in all — mostly between the hours of about 2 and 8pm when Australians arrive home on one of those 35-plus-degrees days.

But the cost of building the extra capacity necessary to deal with those few hours every year is enormous. Federal Energy Minister Martin Ferguson has taken to including in every speech on this issue the following startling statistic: Every time someone in Australia installs a $1,500 air conditioning system, it costs $7,000 to upgrade the electricity network to make sure there’s enough capacity to run that system on the hottest summer day.

In all, the cost of upgrading the network to meet growing peak demand, for air conditioning and other energy hungry appliances, accounts for around a third of the $46 billion being spent on the network over the next few years, according to Chris Dunstan’s “Roadmap”. That’s a staggering $14.9 billion of capacity, which we use for just a few days each year.

What the academics, politicians, industry bosses and lobbyists all agree on is this: the only way to reduce electricity prices is to drive down that peak demand, so that we don’t have to spend some of those billions in infrastructure. Why we haven’t managed to do that over the past few years, as electricity prices have become a hot political issue, is a question worth trying to answer.

Photo By Mike Bowers

George, Master of The Grid

“It’s all well and good to say I’m the big bad guy from the power company,” says George Maltabarow, the chief executive officer of Ausgrid, which operates the largest electricity network in Australia. “But if the lights go out, I’m in the frame.”

Ausgrid supplies 1.6 million homes and businesses in Sydney, the Central Coast and the Hunter region of New South Wales. Its share of the $46 billion national network upgrade is $8.1 billion, to be spent in the five years up to 2013-14.

Across the whole of NSW, that scale of investment by Ausgrid and the other networks is the major factor in driving up average retail electricity prices by as much as 83 per cent over the five-year period.

Given the noisy public backlash over those price rises, it is fascinating to try to imagine the mood in meetings between Maltabarow and the owners of his network, the always-politically-sensitive NSW State Government.

Ausgrid has a pretty simple business model. Mostly, it makes money based on the volume of electricity it sends across its network. But it also can turn a profit from expanding its network, because the regulator allows Ausgrid to levy a healthy 10 per cent return on that capital investment.

Photo courtesy of NASA

A view of Europe at night from the International Space Station.

But George Maltabarow insists that’s not what is driving him. He says Ausgrid has had to scramble to keep up with peak demand, which has increased 70 per cent over the past 20 years, whereas day-to-day demand for electricity has grown just 30 per cent over the same time period.

“[What] the likes of Chris Dunstan … [don’t seem to have] taken into account is that my job is to make sure that wherever someone turns something on, the power’s there. It’s instantaneous and it’s unforgiving. I can’t control how many heaters or air conditioners or bits of electrical equipment people want to buy and connect. We have to size our system for the hottest day of the year when everybody’s got everything on. That’s the one day we have to plan to meet, otherwise the system will fall over.”

“I can’t control how many heaters or air conditioners or bits of electrical equipment people want to buy and connect.”

− George Maltabarow, CEO Ausgrid

This is not a personal opinion. It is a requirement. Part of the reason electricity costs in Queensland and NSW are increasing more rapidly than other states is that network CEOs such as George are being held to higher standards of reliability, set by State Governments. The Sydney CBD has the highest reliability standards in the country. Critics charge this brings out the worst in network engineers, encouraging them to gold-plate the system.

“Gold-plating implies excessive expenditure,” says Maltabarow. “What I’m talking about is prudent risk management. The costs of a major blackout far outweigh the costs of a little bit too much more investment.”

It is perhaps surprising to learn that George Maltabarow is among that 30 per cent of Australians who do not enjoy the comforts of air conditioning. “I don’t live that far west [in Sydney],” he explains. Given that he spends his days working out how much he is going to have to spend to indulge those of us who do have air conditioning, Maltabarow is not unsympathetic to the idea that perhaps Australians should be forced to manage their demand for electricity.

It’s not as if we don’t know what that feels like. During drought, water use was regulated. Tough new rules were enforced by officers in cars cruising the neighbourhoods, peering through the passenger side windows at the guilty gardener, the furtive car washer or the elderly nostalgic reliving the good old days when he could hose the concrete. Similarly we expect limits on our computer downloads as a normal way of doing business.

But Maltabarow says candidly that in his highly-regulated business he has absolutely no incentive to drive down energy use, which he says frustrates him. “Well, yes it does because we get criticised by people for not doing it. On the other hand, I’m not a charity. I’m a regulated business. And like any business I respond to incentives.”

Photo Courtesy of Rooty Hill RSL

Richard Errington.

The Aptly Named Critic

One of George’s most articulate critics is the marvellously named Dr Muriel Watt, an Australian academic with an international reputation who is also the chair of the Australian Photovoltaics Association, which advocates for solar power. “It’s a case of nominative determinism. Your name determining what field you work in,” she says of sharing a name with the Sir James Watt, Scottish inventor and mechanical engineer, who had a unit of energy named after him. He is ”possibly a distant relative. My grandfather was Scottish.”

She has no time for what she sees as the profligacy of big energy. “They don’t want you to use less [power] because they make less money when you use less. The retailers make money so they don’t want you to use less. The generators make money [by selling more]… and the networks make money from every kilowatt hour that goes through their network, so they don’t want you to use less either.”

Watt cites the very different attitudes in Europe. In Italy, she says, if a household exceeds its allocated electricity usage — perhaps by installing too much air conditioning, or some other energy hungry appliances — the lights could well go out and the customer would be forced to pay for a second connection. That would mean steep upfront costs and ongoing charges, which in Australia would translate as a second daily connection fee of anywhere up to one dollar per day. “They’re just brutal over there. Here, that would be unacceptable politically,” Watt says.

In Britain, where Kevin McCloud, the presenter of the TV program Grand Designs, once quipped that most of the 26 million existing houses “are about as well insulated as a rabbit hutch,” the Government has decreed that by 2016, all new houses will need to be zero carbon. That will mean exacting standards for energy efficiency because they will be required to supply as much electricity as they use on average over the day.

“We’ve been lax in Australia,” says Watt, citing the rash of poorly insulated McMansions and other housing thrown up over the past few decades, which will generate huge electricity bills for their owners for years to come.

While building standards are improving, she says, the political fallout over the Federal Government’s “pink batt” rollout means that existing housing stock is not being made more energy-efficient. “No one wants to talk about insulation any more. [But] it’s by far the best thing we should be doing. Slapping PV [solar panels] onto a house that doesn’t worry about energy use doesn’t get you where you want to go.”

Add to that the lax standards for commercial buildings, many of which she describes as horrendous: “Look at all that west-facing glass and no shading. Not sensible at all.

“Everything has been very cheap and easy,” she says, “and it’s not going to be now.”

Photo By Mike Bowers

Loy Yang, Victoria’s single largest power station.

The Moment of Truth

In fact, we have arrived at a tipping point. Politicians have learned the hard way that electricity can be very dangerous. Their constituents are disgruntled about rising prices, governments in turn are furious with the regulator for greenlighting the $46 billion in capital expenditure in the first place, and the mild-mannered engineers in business suits who run the electricity networks have been startled by the ferocious backlash from customers, urged on by local newspaper campaigns.

But unless something changes, the whole cycle is about to start again.

The networks companies — hogtied to antiquated rules that require them to supply as much power as individual consumers decide to use — are preparing to apply for the next cycle of network capital expenditure, beginning in 2014.

Once again their catch cry will be “supersize me,” with industry insiders confirming the networks might well want to spend another $40 billion to keep up with what they believe will be galloping demand, not only from all the usual sources but from electric cars, which the industry believes will become increasingly popular in future.

Another five years of network upgrades would lock in another five years of rising electricity prices.

Add to that the impact of the carbon tax from July onwards (add 10 per cent to a retail bill) and the rising cost of green schemes (6 per cent for Canberra’s Renewable Energy Target Scheme alone) and the issue is set to get much hotter, just as the summer of 2013 rolls around and with it, the next federal election.

What is fascinating about this loaded policy issue is that everyone — governments, industry, academics and lobbyists — knows just what to do about it.

Firstly, they agree a way must be found to make Australians get serious about energy efficiency. Chris Dunstan says clear targets and incentives need to be created, to encourage industry. “People need much more information and education about energy efficiency. Not just an insert in their bill listing five things they can do to reduce energy use.”

Secondly, there is a consensus emerging that Australians should be made to pay something closer to the real cost of electricity through time-of-use pricing to flatten out those costly peaks in demand.

The final step would be to remove barriers to generating power closer to where it is used. That would reduce the need to keep investing billions of dollars in the long-distance network, which delivers power from huge, centralised generators all the way to our far-flung cities and towns.

And the signs are that the industry is poised for change. But that won’t be enough. Given the tangle of conflicting interests, any change will require strong Federal political leadership and focus. And they have less than 12 months to pull it off.

This is the best article I've read, analysing the causes of rising energy prices in some detail.

A while back the Victorian government started to roll out 'Smart Meters', which I assume would allow changing depending on the time of day (although they won't be used in that way). Such meters allow a targeted tariff scheme to be introduced to address peak energy use. Importantly, high-use consumers can see, from their bills, what behaviour is leading to high bills.

The other issues is providing subsidised energy infrastructure to new developments. This means we all pay for the urban spread - where most of the McMansions are being built.

Fascinating article. I didn't realise that infrastructure costs had such a large portion of the cost burden - especially the peak-demand issue.

The political angle is also relevant. The ALP seems to be ignoring the issue - it's mainly a state problem, after all, and between the carbon tax and the insulation scheme, they've poisoned the well for federal intervention. Meanwhile, Abbott is going around screaming about coming price rises due to the carbon tax, while knowing full well that the carbon tax has nothing (much) to do with it.

One point I disagree with is the impact of electric cars. As we move towards more decentralised renewable energy sources, we will, by necessity, invest more into storage solutions. Electric cars - which spend 90% of their time idle, especially the peak usage times - represent a decentralised storage opportunity close to the areas of usage. Storage of power will go a long way to easing that peak-demand problem - which only exists, as mentioned in the article, for about 40 hours a year.

We need to focus on energy efficiency, but we also need to ensure that we meet peak-energy demands by tapping stored reserves, not by generating more power. This will help us move to a more sustainable future. Using stored power will still require a lot of infrastructure investment, but it will be an investment in 21st century technology, not 19th.

February 6, 2012 @ 8:24am

by Liz

I hope that one of your pieces in this series will be about the disgraceful "star rating" system in Australia.

Did you know that in this country (unlike UK & US) a star rating is a design star only and not a measured star?

I have associates who have done research on two "6 star" houses, built next door to each other in a housing development in Point Cook (Melbourne). Both operate as less than 6 star, one house is 4 star and the other 4.5 star.

This raises huge implications for the carbon accounting being done by the Federal Government, as well as for homeowners who think they are getting something that they are not (class action anyone?).

A simple remedy would be to require that all new houses have an energy audit performed before people move in to confirm whether the building envelope has been properly constructed. An even better option would be, in addition to an audit, to ensure that home builders modify house designs to take into account the street facing (north, west etc) so that the home-owner is aware that by putting certain "design features" on their houses they will cost themselves in terms of energy.

Keep up the good work!

February 6, 2012 @ 11:00am

by Mandyvuk

If everyone applied their electricity conscience to their work place as they do their household; this would be a major start to the change that's needed in this country.

February 6, 2012 @ 11:39am

by Phil

For the past 12 years we have made do with solar power and through it have saved enormously over that time. We have all the trimmings of a modern home without the high electricity bills.

The real cost of installing a standalone solar (PV) system is not as expensive as the industry would tell you. When PV subsidies became available and the rush was on to sell the generated electricity back to the grid the price of installing a system shot up. Bit like the home insulation fiasco! Householders were being quoted ridiculously large sums to have a 1.5kwh or 2kwh grid connect system installed.

One of the most expensive components of a standalone PV system used to be the panels. When I purchased our 80watt panels we paid close to $800. Today the same panels are more like $200 to $250. Panels are guaranteed for 25 years.

For a 1.5kwh standalone PV system, capable of running a home with energy saving appliances, a system should cost under $15000. A neighbour told me last night that his electricity bills are around $1000 a quarter. It wouldn't take long to pay off a 1.5kwh solar PV system at these rates and at the same time reduce our dependency on fossil fuels.

February 6, 2012 @ 12:06pm

by Alicia

Here in W.A, if you have a smart meter you can opt for paying insanely more for your power - SmartPower - at peak times, and insanely less at off peak times, and almost normal at shoulder times. We're in the summer pattern now.

What your article implies is that this choice isn't available Australia wide...is it not? I'm surprised because it really seems to be addressing the problem of peak usage.

High energy requirement tasks like running the dishwasher and washing machine after 9pm or even just running the pond pump on weekends only make a huge difference. Having devices that have timers is very helpful this way - load and set!

Weekend rates all year round are 16.92 from 7am to 9pm and 10.78 after 9pm.

To compare, the Standard Flat Rate is 20.83 KWh2.

February 6, 2012 @ 12:23pm

by Scuzzi

I agree with Robert, although electric vehicles are not currently set up as a buffer I think it isn't a bad idea to add it to a distributed model of power generation. At worst they could function as a localised Uninteruptable Power Supply.The concept of decentralised generation, a distrubuted power generation model, is a good response to the rising cost of distribution from our current centralised system.The Government were on the right track I believe with the introduction of the insulation and household solar generation schemes. Home solar generation provides a reduction in demand precisely on the days when it is most needed.It's a pity the schemes are falling foul of political opportunism, I would have liked to have seen them expanded.The figures quoted showing $7k as the cost of installing one air conditioner makes one wonder why this is simply not offset by installing a solar unit on the roof of each installed premises. Perhaps even legislating them as compulsory in new developments as I believe insulation now is.

February 9, 2012 @ 2:02pm

by Peter

$1000 per quarter?Phil - if your neighbour has a bill of $1000 per quarter - at 25cents/kWh that would equate to 44 kWh/day! A 1.5 kW PV array can be expected to generate about 5 kWh/day so your neighbour would be very disappointed. His problem is that he is a huge electricity hog!

February 9, 2012 @ 5:43pm

by Dave

One big problem with all this is that people who rent in a tight market, can't install solar, reinsulate, change to LED lighting etc. If you are doing well enough to own, you might be able to afford this, but if you rent, its not yours to change...

February 11, 2012 @ 12:51am

by Anthony

I agree with Dave. Tenants can do very little to improve energy efficiency in their home. The most they can really do is use appliances less and replace incandescent light globes with CFL globes. No solar systems or insulation for us. There isn't even any point in paying for an energy meter wired into the mains to monitor our electricity consumption as we would have to leave it behind when we vacate the property.

February 15, 2012 @ 10:56pm

by dave

I agree with Scuzzi's comments about solar. This article, while being very informative, fails to discuss why solar power at its peak on hot days would fail to pick up at least most of the extra power load, for even a medium sized solar / air con system. McMansions etc maybe a different proposition.

Part 2 of this article then suggest that more centralization via energy companies switching off some of our appliances is the only answer while still continuing with the wasteful line-loss model. Isn't this still 20th century "control" type thinking / consumers-can't-manage-their power type thinking that perpetuates this old style thinking that corporations would prefer?

February 17, 2012 @ 9:32am

by Anthony

Yes costs of new infrastructure outweigh any impact from the carbon price. A few immediate measures: 1/. increase the kw demand charge to large business users so they are incentivised to address power factor and manage peak power use thro storage or onsite generation; 2/ require ceiling insulation and window shading before permitting air conditioner installation thro regulation of trades or building permits. 3/ mandate periodic audit and optimisation of existing commercial HVAC systems by independent accredited assessors.In the longer term we need greater community say in how much generation capacity gets built so that utilities can be encouraged to choose between investment in energy efficiency and new capacity.

March 15, 2012 @ 11:32am

by James

Thank you for a well written and informative article which I have asked my final year engineering students to read. I hope you keep it on the site for a few more months. I hope these articles will be available in future years too. Please let me know how you plan to do that.

Thank you!

March 18, 2012 @ 11:05am

by Dallas

A solution to minimizing the electricity grid would be to use load following small power stations that produce cheap power. The application of an exciting form of nuclear power may be the answer. The Liquid Fluoride Thorium Reactor (LFTR) technology is load following, can be constructed in small or large installation, does not require water for cooling and offers the production extremely cheap safe nuclear power. It is currently in development in the USA by Filbe Energy Inc, in the Czech Republic by Thorium Energy Pty Ltd and in China. Last November the Thorium Energy Pty. Ltd. presented their technology at a Thorium Energy Symposium which was held in Parliament House Canberra. There is an opportunity for ANSTO to become involved in the development of this nuclear power for Australia, but it requires political will.

March 18, 2012 @ 1:26pm

by Marg

In Qld if the state government had not stripped power company's reserves for years, that prevented them from building infrastructure or up-grading generation facilities then there would not now be such a short fall. Instead, Beattie took the money and then Bligh sold it off and both pissed away the money on thousands of public servants (hundreds of them in the Premier's Dept for spinning) or other nonsensical schemes that wasted it all.

March 20, 2012 @ 3:42pm

by jokejo

more wind

March 23, 2012 @ 7:45pm

by Jim

Thanks Ellen Fanning for this story on the price of power.I would like follow Alicia's lead and detail my energy costs.I live Victoria and have had solar panels since July 2009.While I am of the PFiT, my post is about price increases over the last couple of years.Before my PV was installed, I was paying 16.54 cents per KWh as the standard rate.The supply charge was 48 cents a day.When the panels and a smart meter were installedI was moved onto a Time of Use (TOU) tariff with new charges:Peak 25.34 centOff peak 10.17 centsQuarterly supply charge $54.48 (about 59 cents aday)

As noted in the story, all these price increases are before the Carbon tax starts in July 2012.

April 6, 2012 @ 1:52am

by Mark

It's not true that solar can pick up 'at least most' of the summer peaks, not when they occur around 4:30 pm, just as PV output is beginning to plummet.

October 19, 2012 @ 8:31am

by luke

How would you define an Elephant, a mouse built to army specifications.

There are much simpler and cheaper solutions then a 46 bil dollar network. One solution is to wire sky scrapers airconditioning into an electronic switch. If peak load is hit they turn off 2-4 blocks of airconditioning in the city for 10 min and cycle it through all the blocks in the city. A city like Melbourne this would mean 1-200MWhr reduction in load and most buildings would only loose aircon for 10min out of every hour. Not comfortable for ocupants but not horrible either. Business which wanted non stop aircon could simply run a generator for that 10 minutes and spend a couple of hundred in fuel costs.

I believe they do a similar thing with hot water in Queensland by pulsing the hot water electrical feed to manage minimum load. They turn the electric hotwater systems on and off by suburb/region at night so coal power stations can keep running without being shut down for lack of power requirements.

This is by far a cheaper solution then 46bil in infrastructure upgrades.

November 8, 2012 @ 3:11pm

Show previous 20 comments

by jusme

i've heard from two different sources now (new matilda and christine milne) that electricity bills have decreased by 8% in S.A due to the windfarms labors rann (an ex green) built. since the msm won't mention it, maybe you guys could verify it... in part 2 maybe? if this is true the whole country needs to know about it.

November 8, 2012 @ 6:44pm

by Harvey

Thanks for the article. I have always believed that there are a huge number of innovative solutions to power consumption, along the lines of the things that luke (above) has suggested, but they require political will to get the community to embrace the changes. The power industry is addicted to their own approach to power generation and will never be a source for innovation, because they just can't thi k outside of the square they have created of big power stations.Why can't power be generated from smaller facilities that combine a range of technologies, thus reducing the huge wastage that occurs when you run power along distant transmission lines.We are on the verge of new more efficient solar technology - this must be made mandatory on new homes, offices and factories.

November 9, 2012 @ 10:28am

by luke

Jusme - I can verify that electricity bills are unchanged. The wholesale price has decreased because they got busted ripping us off but I am not aware of anyone who now has a smaller bill, regardless of what the polies and media say. Mine came in 3 weeks ago and was 24% more expensive.